GST compensation shortfall: Finally, all states pick Option 1

After initial opposition, all 28 states and three Union Territories with legislature have opted Option 1 to meet the revenue shortfall arising out of the Goods and Services Tax (GST) implementation. Under this option, the Centre has set up a special borrowing window which has been operationalised since October 23. The Centre has already borrowed Rs 30,000 crore on behalf of the states in five instalments and passed it on to them and UTs.

Under the terms of Option 1 besides getting the facility of a special window for borrowings to meet the shortfall arising out of GST implementation, the states are also entitled to get unconditional permission to borrow the final instalment of 0.5 per cent of gross state domestic product (GSDP) out of the 2 per cent additional borrowings permitted by the Centre under Atma Nirbhar Abhiyaan. This is over and above the special window of Rs 1.1 lakh crore.

Free Press Journal broke the story on Maharashtra government’s decision to go in for Option 1 as it can now raise additional borrowing of Rs 15,394 crore at 0.5 per cent. The state government has so far received Rs 4,167.99 crore through special window.

Now, Jharkhand will also receive funds raised through this window starting from the next round of borrowing. On receipt of the choice of Option-1, the Centre has granted additional borrowing permission of Rs 1,765 crore to the Jharkhand government (0.50 per cent of Jharkhand’s GSDP).

The Centre will release the next instalment of Rs 6,000 crore to the States/UTs on December 7.

The states had questioned who will bear the burden of repaying Rs 1.1 lakh crore and they had also demanded that the Centre instead of states should borrow this amount too. States had also raised concerns that the distinction of revenue loss for GST implementation and coronavirus pandemic was unconstitutional.

Thereafter, the Union Finance Ministry had clarified that the entire Rs 1.1 lakh crore estimated shortfall arising on account of GST implementation (excluding COVID losses) would be borrowed by the Centre in appropriate tranches and would be passed on to the states as a back-to-back loan in lieu of GST compensation cess releases. It will avoid differential rates of interest that individual states may be charged for their respective state development loans and will be an administratively easier arrangement, it pointed out.

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